Global manufacturing shrinks for first time since 2009, India output falls

Employees work inside Maruti Suzuki's newly launched petrol engine plant on the outskirts of New Delhi October 21, 2008.

WASHINGTON/LONDON (Reuters) - Global manufacturing shrank for the first time in over two years in September, reinforcing fears of another recession despite a modest bounce in U.S. factory activity.

Against the trend, manufacturing activity in the U.K., U.S. and Canada picked up speed, but slumps in factory output in Europe and Asia raised questions about the sustainability of the rebound.

World stocks kicked off the final quarter of the year lower on Monday, as the manufacturing data and concerns about a possible Greek debt default weighed on investor sentiment.

The Global Manufacturing PMI, compiled by JPMorgan with research and supply organisations, fell in September to 49.9 from 50.2 in August. It is the first time since June 2009 that the index has fallen below the 50 mark that divides growth from contraction.

"The signs point to weak growth or possible month-to-month declines in industrial production in the next few months," said David Hensley at JPMorgan.

EUROPE MANUFACTURING CONTRACTS FOR SECOND MONTH

In Europe and Asia, factory activity dropped in September to levels not seen since the depths of the 2008 financial crisis as export demand dropped.

Europe's leaders have so far managed to prevent the euro zone debt crisis from triggering a recession, but the data points to worsening economic fortunes across the region.

Markit's Eurozone Manufacturing Purchasing Managers Index (PMI) which gauges changes in the activity of thousands of factories in the countries that share the euro, fell to a final reading of 48.5 in September from 49.0 in August.

It is the second consecutive month the euro zone manufacturing PMI has been below the 50 mark that divides contraction from growth.

"In a nutshell, the recession in the euro zone periphery's manufacturing activity is weighing on the overall euro zone index that, in September, suggests that the economy is not growing in Q3," said Annalisa Piazza at Newedge.

Mounting evidence of a weakening euro area economy prompted some economists to predict the European Central Bank will cut interest rates at its meeting on Thursday, although most expect it to wait until the new year before easing policy.

Factory activity in Spain, struggling under harsh austerity measures like much of the euro zone periphery, fell at the fastest pace in more than two years, surveys showed on Monday.

French manufacturers saw activity decline for the second month in a row. Even in Germany, the biggest and arguably the most prosperous economy in the 17-nation bloc, manufacturing growth effectively came to a standstill.

But British manufacturing unexpectedly grew for the first time in three months, although a slide in new export orders highlighted the dangers facing the sluggish recovery.

CHINA OUTPUT UP, INDIA FALLS

In China, the HSBC PMI for China's services sector rose to 53.0 in September, recovering from an all-time low of 50.6 in August, lifted by new orders.

But China's factory activity typically rises in September as businesses prepare for the Golden Week holiday, and this year's increase was smaller than the average. The softness in the Chinese data, along with Europe's ongoing troubles, helped send copper prices to a 14-month low.

"A recession in the global economy could cause a China hard landing," Barclays Capital economists wrote in a note to clients, adding that this was not their baseline forecast.

India's manufacturing output recorded its biggest monthly decline since late 2008, going from robust growth to near stall speed in just five months and a fall in the new orders index for the sixth straight month suggested more weakness ahead.

Asia's export orders have fallen since midsummer as the euro zone debt crisis intensified and the U.S. economy slowed. So far, the data points to a moderate slowdown in China and elsewhere in Asia, but another U.S. or European recession would change the equation.

In Japan, a similar report on Friday showed the manufacturing sector contracted in September for the first time in five months, suggesting its economy was back in the doldrums.

US FACTORIES REBOUND

U.S. factory output grew more quickly in September as production and hiring increased, suggesting manufacturing would help keep the economy from slipping into a new recession.

"The data lends credence to the idea that there is some strength in the economy, which is nice to see for a change," said Randy Bateman, chief investment officer, Huntington Asset Management in Columbus, Ohio.

The Institute for Supply Management said its index of national factory activity rose to 51.6 last month from 50.6 in August, but new orders fell for third month.

"It's not a robust reading, due to concern about new orders," said Bradley Holcomb, chair of the U.S. Institute of Supply Management's business survey committee.

Canadian manufacturing activity picked up pace for a third straight month in September, boosted by both output and new orders, data released on Monday showed, offering hope the economy will avert another recession.

The RBC Canadian Manufacturing Purchasing Managers' Index, launched this year by Royal Bank of Canada and produced by research firm Markit, rose to 55.05 in September from 54.9 in August.

(Additional reporting by Emily Kaiser in Singapore, Andy Bruce in London, Yati Himatsingka in Bangalore, Leika Kihara and Tetsushi Kajimoto in Tokyo, editing by Clive McKeef)